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Financial Literacy, Financial Behaviour and Individuals’ Over-indebtedness


  • Elisabete Santos
  • Margarida Abreu


This work analyses the impact of financial literacy and financial behaviour of individuals on the likelihood of over-indebtedness, controlling for socioeconomic factors, the type of mortgage and the event of a negative income shock. Using the data from the 2009 National Financial Capability Study of the United States, we consider three self-reported measures of over-indebtedness: financial distress, arrears and foreclosure. Using the data from the National Financial Capability Study carried out in the United States in 2009, we have defined three measures of over-indebtedness – financial distress, arrears and foreclosure -, and constructed a financial literacy index and a financial behaviour index. The financial literacy index is constructed using questions on the compounding of interest rate, inflation, bonds and stocks, mortgage payment and risk diversification. The financial behaviour index is based on questions concerning individuals’ financial choices related with budget management, savings, bank accounts, credit, insurance and financial advice. Results show that gender matters for the intensity of over-indebtedness. Men have higher probability of experience financial distress or being in arrears but have lower probability of getting involved in a foreclosure process. In addition to the impact of socioeconomic factors, we conclude that financial literacy contributes to the prevention of over-indebtedness since individuals with higher levels of financial literacy are less likely of becoming over-indebted. Also, individuals who engage in positive financial behaviours, such as spending less than their own income, setting a ‘rainy day’ fund, using credit wisely or looking for financial advice, are less likely to experience severe financial difficulties. Independently of the level of financial literacy and of financial behaviour, experiencing a large drop in income is an important determinant of over-indebtedness.

Suggested Citation

  • Elisabete Santos & Margarida Abreu, 2013. "Financial Literacy, Financial Behaviour and Individuals’ Over-indebtedness," Working Papers Department of Economics 2013/11, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
  • Handle: RePEc:ise:isegwp:wp112013

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    References listed on IDEAS

    1. McCarthy, Yvonne, 2011. "Behavioural characteristics and financial distress," Working Paper Series 1303, European Central Bank.
    2. Margarida Abreu & Victor Mendes, 2010. "Financial literacy and portfolio diversification," Quantitative Finance, Taylor & Francis Journals, vol. 10(5), pages 515-528.
    3. Angela Hung & Andrew Parker & Joanne K. Yoong, 2009. "Defining and Measuring Financial Literacy," Working Papers 708, RAND Corporation.
    4. Luisa ANDERLONI & Daniela VANDONE, 2010. "Risk of over-indebtedness and behavioural factors," Departmental Working Papers 2010-25, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    5. Lusardi, Annamaria & Mitchell, Olivia S., 2011. "Financial literacy around the world: an overview," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(04), pages 497-508, October.
    6. Gathergood, John, 2012. "Self-control, financial literacy and consumer over-indebtedness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 590-602.
    7. Christelis, Dimitris & Jappelli, Tullio & Padula, Mario, 2010. "Cognitive abilities and portfolio choice," European Economic Review, Elsevier, vol. 54(1), pages 18-38, January.
    8. Bucks, Brian & Pence, Karen, 2008. "Do borrowers know their mortgage terms?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 218-233, September.
    9. Richard Disney & John Gathergood, "undated". "Financial Literacy ad Indebtedness: New Evidence for UK Consumers," Discussion Papers 11/05, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    10. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
    11. repec:use:tkiwps:2323 is not listed on IDEAS
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    Cited by:

    1. Bajo Emanuele & Barbi Massimiliano & Sandri Sandro, 2015. "Financial Literacy, Households' Investment Behavior, and Risk Propensity," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 157-174, June.
    2. Azwadi Ali & Mohd Rahman & Alif Bakar, 2015. "Financial Satisfaction and the Influence of Financial Literacy in Malaysia," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 120(1), pages 137-156, January.

    More about this item


    Personal Finance; Over-indebtedness; financial behaviour; financial literacy.;

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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